Apple’s most recent launch has led experts to believe that the company’s real strategy is pricing. Marketers want to mess up with our capacity to decide if we are indeed getting a good deal, the tactic that Apple favors is decoy pricing. While there are several ways to employ decoy pricing, every instance includes the existence of one product whose sole purpose is to promote the sale of another product. The iPhone 8 and 8 Plus, priced at $799, look shockingly similar to the iPhone7. A closer look, though, reveals that they offer an improved battery life and an updated camera. The iPhone X, on the other hand, stands out as the first phone with a four-digit price tag. The regular version is retailing at $999, with enhanced versions available for a whopping $1,129.99. The pricey phone offers facial recognition, wireless charging and a full screen. There’s just one glaring question: are people really going to shell out more than a thousand bucks for a phone? Experts believe that, in order to make that happen, Apple first introduced the iPhone 8 as a price decoy.

In Marketing the decoy effect is one of the phenomenon  whereby consumers tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically (lacking symmetry) dominated. The option of asymmetrically dominated which is often inferior in all respects to one option, but, in comparison to the other options, it is inferior in some respects and superior in others gets consumed by the consumers. In other words, in terms of specific attributes determining preferences, it is completely dominated by one option and only partially dominated by the other. When the asymmetrically dominated option is present, a higher percentage of consumers prefer the dominating option than when the asymmetrically dominated option is absent. The asymmetrically dominated option is therefore a decoy (bait) serving to increase preference for the dominating option. The decoy effect is also an example of the buyer decision theory. To put it more simply, when deciding between two options, an unattractive third option can change the perceived preference between the other two.

Products such as Pepsi or Coca-Cola play this trick. They simply add a third size which resembles the larger one, but is obviously a worse option. The above picture explains how smaller sized bottle and medium sized bottle act as decoy 1 & 2 to choose the bigger sized costing $2.18 bottle. In many experiments, the trick has already been proved to work. The decoy effect has even been used to steer people towards creating more secure passwords, we are nudged to create asymmetrical passwords.

The Decoy Effect phenomenon is a concept from the books of Economics and who know it better than the widely read magazine, The Economist. The publication cleverly strategizes the pricing of their print and digital subscription making the combo look the best deal amongst all. Here is how they price their subscription:

• Web Subscription – $59
• Print Subscription – $125
• Web and Print Subscription – $125

The first offer of $59 seemed reasonable. The second option (only print) seemed a bit expensive, but still ok. But, the third option of both Web and Print for the same price as the print-only subscription attracts most readers in world.

The decoy effect was first investigated as a potential marketing strategy to influence consumer choices. One of the latest research shows that it could also have potent effects in recruitment, healthcare, entertainment, even politics. It shows us just how easily our judgment sways by the context in which the facts are presented; this even when that additional information may have no bearing on the overall judgment. The decoy effect was first documented in the 1980s.

Price is the most delicate element of the marketing mix, and much thought goes into setting prices to nudge us towards spending more. The price of product should be set in such a way that buyers can pay and company can earn adequate profits. In case of price-sensitive customers on one hand and the prestige-sensitive customers on the other hand, the pricing decisions become most vital in marketing.

Customers’ price sensitivity can be solved with psychological pricing. Certain prices or the way prices are displayed can influence a customer’s decision-making process during a purchase. Such pricing strategies are a simple and cost-effective way to increase sales without reducing your product prices. Some pricing strategies tend to play in the emotional side of our brain rather than our rational brain. No price is ever really high cost or low cost without having something to compare the cost to; it’s all about perceived customer value. Why does our brain work like that? A creative mind can find a lot of possible explanations, all of which may be a little true. But the decoy effect seems to depend at least a little bit on the need to justify a decision to others. Finding the right pricing strategy to sell your products can be challenging and complex process.

How decoys work? When consumers are faced with many alternatives, they often experience choice overload. Psychologist Barry Schwartz has termed the tyranny or paradox of choice. Multiple behavioral experiments have consistently demonstrated that greater choice complexity increases anxiety and hinders decision-making. In an attempt to reduce this anxiety, consumers tend to simplify the process by selecting only a couple of criteria such as say price and quantity to determine the best value for money.

Cherry picking is marketing term to define customers who are price sensitive and they go from store to store to pick up best priced bargains. Mr. Eitel invented the cherry picker, a hydraulic crane originally designed to lift and lower people to pick cherries high off trees. It lets the fruit picker pick fruit high in a tree with relative ease. He invented the telescoping crane after enduring a tough summer harvesting cherries on a farm and founded Telsta Corp. The marketing term ‘cherry pickers’ has been originated from there. The price sensitive customers don’t mind spending their time and energy while going from store to store to pick up the best priced products and services. A substantial number of shoppers exist who are very practical, shrewd   and diligent enough to make cherry picking pay off.

A research by Stephen Hoch and Edward J. Fox  marketing professors at the Cox School of Business at Southern Methodist University confirm that when customers visit two super markets let’s say in ten categories and buy product at lower or higher price, the customers save up to 8%.  Hoch says that more than a few marketing experts and consumers consider cherry picking a “perverse” kind of shopping behavior and doubt that all the effort required to be a complete cherry picker is economically worthwhile. Hoch & Fox further comment that their research findings hold inferences for retailers who are the targets of cherry pickers. They do not fight cherry-picking and risk alienating customers; instead, try to entice cherry pickers into buying higher-margin items.

Cherry picking is worth its efforts because of a combination of factors when people go cherry picking, two things happen: They double the number of discount opportunities that will be available to them because they go to two stores. And, because stores have deals on more than one item, that increases the opportunities for cherry pickers to save money. The second thing that really makes cherry picking worth it, is that these shoppers buy more items than other shoppers. To make cherry picking pay off, you have to buy a lot of stuff. Cherry pickers perceive that they need to increase economies of scale to take advantage of the discounts available. It works great when customers shop till they drop. They save a lot not only in percentage terms but in money terms, which is what really counts.

Demographically, cherry pickers come in from all ages, monetary status, professions, educational qualifications – they are not much different than most people, except that they are single-minded about sniffing out low prices and pouncing on them. Cherry pickers usually have more time on their hands and have the endurance, most importantly they are aware of facts because of their research. According to Hoch’s research, they are usually older people with years of experience and seasoned. Older people are often price-sensitive because they are on fixed incomes. Cherry pickers have slightly larger families than most people. However, some cherry pickers are rich. They are always on lookout of news items in newspapers, magazines, on TV etc. They plan their day accordingly prior to their shopping; they pick some cherries here and different cherries there.

Cherry picking results into increased channel blurring; especially in Consumer Packaged Goods (CPG) category. CPG marketers understand that consumers are seeking low-cost solutions to everyday needs, and they are acting to capitalize on that opportunity. The key takeaways for people who have been tempted to try their hand at cherry-picking is detailed research; where, when, why, how, what, how much, discounts etc, etc. Researched shopping can really pay big-time dividends if shoppers buy a lot of the item or items that their research has shown to be offered with discounts. For dirt cheap rates, they should buy the biggest box, bottle or carton available, buy as many as they can afford, and find a way to make room for all the stuff in their basement or garage.

Channel blurring: One effect of cherry picking is blurring of marketing channels.  Faced with budget constraints and higher food and fuel prices, many shoppers are tend to trim their basket size to save money while making more frequent trips to nearby grocery stores, vegetable store or drug store. In turn, drug and grocery stores have boosted their food and beverage offerings, while many grocers are rounding out their personal care product lines. With 55 percent of consumers eating out less often than prior to the recession, grocery retailers have stepped up their merchandising of convenient prepared foods while updating store formats to attract more consumers. Across channels, two-thirds of CPG (consumer packaged goods) categories have enjoyed increased merchandising support during the past few years. Aviation industry is also on packaging spree to attract more and more cherry pickers. Most corporations have tied up with a travel portal for offering travel packages at inclusive rates which also includes visa fees, airport transfer, apart from five star hotel stay, sight-seeing etc. The airlines are also offering installment facilities in which one has to pay a part of payment at the time of booking and paying the rest in two installments. This is how marketing channels are really blurring. And cherry pickers in their quest for value, consumers increasingly are willing to shop at a variety of channels to find the products they want at prices they can afford.

Cherry-picking varies depending on whether the store is the shopper’s primary grocery outlet or a secondary preference. The reasoning for this analysis is that shoppers are habituated to pick certain items from there and visit the secondary store to look out for sale and other bargains. In the secondary store shoppers spend as much in the primary store, and when they do patronize it, they opportunistically buy more sale items. According to Hoch and Fox secondary stores are hurt more by cherry-picking than primary stores because the pickers go there to buy low-cost items and virtually nothing else. Not only do secondary stores sell less per shopper, they also earn lower margins on what they sell to cherry pickers.

Message to Retailers: Hoch and Fox tell the retailers especially those in the grocery business and other household items types of retailing that they should simply accept that cherry picking happens and to do what they can to encourage shoppers to buy other goods. The fact is that in today’s economy, shoppers will continue to be careful about how they spend, and old channels will keep on blurring. E commerce as it is has redefined marketing channels. Retailers must learn to embrace complexity. While their brand might have been founded on certain attributes, but customers look out for many other attributes such as added value, convenience and newness. Carving their own niche can add strength. Retailers who try too hard to be all things to all people can overreach, just as those who focus too much on an ideal “core customer” can miss valuable opportunities. Awareness of channel-blurring also will be more important for some retailers than others. Cross merchandizing can be of great help, so when people come in to buy that one item (that is on sale), they can increase the customer’s basket size. However, the cross merchandizing needs serious thinking and practical approach.